Would Bill Gross Buy mREITs?

Bill Gross of PIMCO is the bond king. He manages the largest fund in the world, PIMCO's Total Return Bond Fund, with assets totaling nearly a quarter-trillion dollars.

So it should come to little surprise he's also one of the most influential fixed-income investors. Recently, he shared his favorite way to play bonds against the backdrop of a possible Federal Reserve taper.

What would Bill Gross do?
In a tweet from Pimco, Gross laid out his simple strategy for positioning for interest rates. Here's the Tweet:

Basically, Bill Gross is a fan of using leverage to buy the three-year U.S. Treasury to get a yield similar to the 30-year bond.

This is, to some extent, what mREITs such as American Capital Agency (NASDAQ: AGNC  ) do. Mortgage REITs borrow money for as little as 30 days to invest in long-dated mortgage-backed securities to get big yields. Sure, mREITs aren't buying investments that mature in as little as three years, but the concept is similar: Borrow short to invest long.

The key to mREITs and Gross' strategy
Investors are worried about a taper. But Bill Gross' point is that a taper probably won't affect short-term interest rates. Federal Reserve members have repeated, over and over again, that quantitative easing would probably end well before the Federal Reserve tinkers with short-term interest rates.

Thus, Gross is comfortable borrowing short-term capital to invest in three-year bonds to generate a larger yield.

Remember, Annaly Capital (NYSE: NLY  ) and American Capital Agency fund their portfolios primarily with 30-day cash borrowed at 0.35% and 0.41%, respectively. Their low funding costs should persist, even if long-term rates rise. Annaly Capital and American Capital Agency would love to continue to borrow at less than 0.5% to invest at 5% or more.

Taper's risks to mREITs
For now, American Capital Agency and Annaly Capital just need to navigate the initial start to rising mortgage rates. Both have reduced leverage and cut their exposure to 30-year mortgages in advance of an expected end to quantitative easing.

Now it's just a waiting game. When rates go up, American Capital and Annaly Capital will see more book value erosion. But on the other side of rising rates is huge potential -- the potential to borrow at 0.5%, invest in mortgages at 5%-7%, and reap massive spreads that can fuel big dividends.

If you think the Fed's taper will come slowly, and short-term rates will stand near zero, mREITs are the perfect way to make that wager. A slow, steady taper and steeper yield curve will eventually prove to be a boon for mREITs' interest spreads.

9 high-yield stocks for rock-solid income
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2768395, ~/Articles/ArticleHandler.aspx, 9/28/2016 2:55:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,313.29 84.99 0.47%
S&P 500 2,167.23 7.30 0.34%
NASD 5,309.48 3.77 0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 2:40 PM
AGNC $19.50 Down -0.10 -0.51%
American Capital A… CAPS Rating: ***
NLY $10.49 Down -0.14 -1.33%
Annaly Capital Man… CAPS Rating: ****